Zara

1. ZARA: Fashion Follower, Industry Leader
Business of Fashion Case Study Competition
Amanda Craig, Charlese Jones and Martha Nieto
Philadelphia University
April 2, 2004

2. ZARA: Fashion Follower, Industry Leader
Table of Contents
Introduction………………………………………………………………….1
Financial Analysis and
Comparison…………………………………………………….…………....1
Strategic
Advantages………………………………………………………………...2-3
Strategic
Drawbacks…………………………………………………………….….. 3-4
Possibilities for
Failure…………………………………………………………………....…..4
Recommendations/Conclusion………………………………………………5
Calculations and Financial
Statements……………………………………….……………….Appendix A
Articles: The Recent Status of
ZARA.……………………………………….…………………...Appendix B
Works Cited
Works Referenced

3. The global apparel market is a consumer-driven industry. Also, globalization and new
technologies have allowed consumers to have more access to fashion. As a result, consumers are
changing, competition is fierce, and companies are evolving to meet these demands. Zara, a
Spanish-based chain owned by Inditex, is a retailer who has taken a new approach in the industry.
With their unique strategy, Zara has the competitive advantage to be sustainable. In order to
maintain that advantage and growth they must confront certain challenges that face traditional
retailers in the apparel industry.
Financial Analysis and Comparison
To prove Zara has the prospect of sustainable growth in the international apparel market,
it is important to understand and compare the financial differences of Inditex, its parent company,
and its major competitor. The most interesting of Zara’s competitors for comparison is Hennes
and Mauritz (H&M), who as the case study states, “was considered Inditex’s closest competitor,
[with] a number of key differences” (Ghemawat 5). H&M differs from Zara because they
outsource all of their production, spend more money on advertising, and is price-oriented. The
key similarities for comparison between Zara and H&M are that they are European based
companies, are fashion forward at lower price retailers, and have a strong international expansion
strategy (1; 5).
Just looking at Exhibit 6 from the case it is easy to see that their financial status is are
comparable (24). Their net operating revenues are closer to each other than that of Benneton or
the Gap, as is their net income. The best way of comparing Inditex and H&M’s financials is by
using ratios and not merely a visual assessment of the financial statements given. The current
ratio1 shows that for every euro in short-term debt, Inditex has 1.02 million euros in current
assets. H&M however, has 3.40 million euros in current assets for every euro in short-term debt.
From this we can infer that Inditex is less liquid, possibly because they have more fixed assets
and turn their inventory over quickly. To support this inference, the inventory turnover ratio2 was
calculated that Inditex turns over its inventory 4.42 times per year. This does not mean, however,
that H&M is more efficient due to its liquidity. H&M is not making good use of the cash that
they have because cash not invested does not generate a return. H&M’s excessive inventories
may be the main contributor to its high current ratio because they do not own manufacturing
facilities and have to store products in a warehouse.
The operating profit margin3 was calculated to measure the efficiency of the companies’
profit per euro of sales. Inditex’s operating profit margin is 21.6% and H&M’s is 13.1%. Inditex
is more efficient in generating a greater profit per euro of sales than H&M. Inditex’s higher
operating income4 is a result of keeping their costs of goods sold and operating expenses much
lower than H&M’s. Inditex’s decreased costs are made possible by in-house production, lower
advertising expenses and keeping a cost-effective number of employees per store. H&M only has
771 stores to Inditex’s 1,284, but has a higher number of employees per store5, 29.7 to Inditex’s
20.8. H&M’s high employee to store ratio is partially to blame for their high cost of goods sold.
There is a disparity between the working capital6 of Inditex and H&M, which is the
money available to meet current obligations. Inditex only has 20 million euros of working capital
as compared to H&M's 1035 million euros. This is because Inditex invests more than H&M in
fixed assets7, Inditex owns 1228 million euros in property, plant, and equipment and H&M only
owns 661 million euros. Having a small amount of working capital could potentially hurt Inditex
because it could affect their ability to meet any liability obligations that may arise.
Inditex is efficient in its operating economics, as compared to H&M, due to the
fact that they have higher margins. Their operating profit margin is approximately 1.5
times higher than that of H&M. Their relative capital efficiency is lower due to the fact
that their working capital and their profits per store are much less than H&M’s. Inditex’s
operating profits per store8 is 54.8% as compared to 76.4% of H&M. This is because
Inditex is building more stores based on projections and anticipated future value. As long

4. as Inditex’s profit margins are high, they will be able to have sustainable growth because
they will have the money to invest and pay expenses.
Strategic Advantages
Zara has been able to achieve excellent financial status due to its core competencies that
provide the chain with a competitive advantage over traditional retailers in the industry. Zara is an
apparel chain that works differently from traditional retailers. Generally, a traditional retailer such
as Express owned by Limited Brands (a top U.S. specialty retailer group), outsources all of its
production while focusing on distributing and retailing those goods. This is due to the fact that the
global apparel industry is “highly-labor intensive” rather than capital intensive (2). Fashion
retailers and apparel manufactures are always seeking to lower costs by outsourcing production to
developing countries where the lowest labor rates are found. In contrast, Zara is a chain that has
developed a successful diverse method of doing business in the fashion industry. Zara by working
through the whole value chain is very vertically integrated and highly capital intensive.
Vertical integration, a distinctive feature of Zara’s business model, has allowed the
company to successfully develop a strong merchandising strategy (Herreros). This strategy has
led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. Zara
manufactures 60% of its own products. By owning its in-house production, Zara is able to be
flexible in the variety, amount, and frequency of the new styles they produce. Also, 85% of this
production is done through the season, which allows the chain to constantly provide its costumer
with very updated products (Ghemawat 9). Traditional retailers lack this flexibility. Traditional
retailers are obligated to place production orders to manufacturers overseas at least 6 months in
advance of the season.
Zara’s in-house production purposely creates a rapid product turnover since its “runs are
limited and inventories are strictly controlled” (12). This rapid product turnover creates a climate
of scarcity and opportunity in Zara’s retail stores. The climate also increases the frequency and
rapidity with which consumers visit the stores and buy the products. Regular customers know that
new products are introduced every two weeks and most likely would not be available tomorrow.
Therefore, Zara’s scarcity climate allows the company to sell more items at full price. This
strategy minimizes Zara’s total cost because it reduces 15-20% of markdown merchandise
compare to a traditional retailer.
Furthermore, Zara’s unique quick response system, composed of human resources as well
as information technology, allows Zara to respond to the demand of its consumer better than the
competition. Zara, who focuses on the ultimate consumer, places “more emphasis on using
backward vertical integration to be a very quick fashion follower than to achieve manufacturing
efficiencies” (12). It is extremely important for Zara to speed the information flow of consumer
desires to their apparel designers. For that reason, Zara has human resource teams in the retail
and manufacturing environment that work exclusively toward this goal.
In the manufacturing environment, Zara’s product development teams are responsible for
attending high-fashion fairs and exhibitions to translate the latest trends of the season into their
designs. Also throughout the season, Zara’s product development teams are constantly
researching the market by traveling to universities, and clubs around the world to track customer
preferences. Additionally, the young, fashionable, and international staff helps to interpret the
desire of the moment (Zara).
In the retail environment, Zara’s managers and sales associates are in charge of
transmitting the sales analysis, the product life cycles, and the store trends to the designers. This
allows the designers in Spain to develop the right products within the season to meet consumer
demand (Ghemawat 10). The transfer of this communication is also accelerated by IT software
that is specifically designed for Zara’s diverse business (Zara).
Zara’s quick response communication strategy is effective due to its management and
corporate culture. Amancio Ortega, the founder of Inditex, still owns 60% of Zara’s shares. Mr.
Ortega has effectively transmitted the values of the company, which are: freedom, perfectionism,

5. responsibility, rapidness, flexibility and respect to others, to his management team (Zara). This
has created a very autonomous and flexible corporate culture for Zara. Also, this has allowed the
company to work horizontally with an open communication environment rather than a hierarchal
one. Due to this, Zara’s managers work in teams in the countries where the chain is located.
These divisional headquarter teams are composed of a head country manager who is constantly
communicating with local managers and reporting to top management (Ghemawat 18). The
constant flow of information between managers allows the company to keep its customers happy,
which results in increased sales.
Moreover, Zara’s centralized distribution facility gives the chain a competitive advantage
by minimizing the lead-time of their goods. Zara’s internally or externally produced merchandise
goes to the distribution center. This is cost-effective due to the close proximities of the
distribution center in Arteixo and their factories in Coruña. In the distribution center, products are
inspected and immediately shipped, since Zara’s distribution center is a place where merchandise
is moved rather than stored (12). Then, to increase delivery speed, the shipments are scheduled by
time zones and shipped by way of air, and land. The typical delivery time within and outside
Europe is between 24 to 48 hours (11).
Zara also has an advantage over its competitors due to its low advertising costs. Zara’s
advertising investment is 0-.3% as compared to traditional retailers who expends 3 – 4% (13).
Zara’s cuts in advertising investments reduce total expenses, which make the international
expansion more economical (16). This also signifies that Zara relies mainly on its stores to project
their image. For that reason, Zara has a department, which exclusively works in acquiring global
prime real estate locations. In addition, this department is responsible for the frequent
refurbishing of store layouts, as well as the creation of a common window display for Zara’s
global stores. The display positions Zara in the industry with a prestigious and elegant image
(Zara).
By targeting a broad market Zara has an international advantage over its competitors.
Zara’s target market is very broad because they do not define their target by segmenting ages and
lifestyles as traditional retailers do. Zara’s target market is a young, educated one that likes
fashion and is sensitive to fashion. Today, people around the world through various
communication devices have more access to information about fashion. Therefore, fashion has
become more globally standardized and Zara uses this to their advantage by offering the latest in
apparel. For that reason, 80- 85% of the products that Zara offers globally are relative
standardized fashionable products. This is due to the fact that Zara’s marketing teams believe that
a product that sells well in a fashion capital such as New York will most likely sell well in
another such as Milan, Sao Paulo or Madrid since fashion has become more globally accessible
(Zara).
Strategic Drawbacks
Although Zara has a successful business model that differs from that of traditional
retailers, it also has disadvantages that can affect its sustainable growth. Due its model, Zara’s
weaknesses also differ from the traditional retailer. Zara holds around 86% of Inditex’s total
international sales-a significantly high number for an organization that has 7 other chains
(Ghemawat 15). With that, Inditex is putting all of their eggs into one basket by sinking a great
deal of capital into Zara. Inditex has contributed their extensive international sales to Zara and
said “Zara was the principal reason Inditex’s sales were increasingly international” (15). If Zara
fails in the future, Inditex will have to totally re-formulate their firm’s strategies and may possibly
face an internal meltdown.
Zara also has an inability to penetrate the American apparel market. This may be due to
American tastes that differ from European preferences. More importantly, however, Zara has not
been able to develop a strong supply chain strategy in the U.S. like they have in Europe. Their
European strategy includes, having a strong production and distribution facility in their home
country in order to have short production and lead times. Zara has not invested in distribution

6. facilities in the Americas, which is a threat to their U.S. selling abilities since the U.S. makes up
29% of the total apparel market (19; 4). This may make them “subject to diseconomies of scale”,
which means that though are aware of how to quickly supply 1,000 stores, they may not be able
to supply more retail locations due to their “centralized logistics model” (12).
Zara’s strategy also creates some weaknesses. Their vertical integration has more
advantages than drawbacks but it is important to recognize its limitations. Vertical
integration often leads to the inability to acquire economies of scale, which means they
cannot gain the advantages of producing large quantities of goods for a discounted rate.
Higher costs are then incurred for the Inditex Corporation. Inditex also has to support
their own high capital investments for their chains and be able to financially back their
“technology and skills beyond those currently available within the organization” (David
145). Zara’s speedy and recurrent introduction of new products incurs increased costs as
well. They have higher research and development costs. They also have elevated costs
due to the constant changeover of production techniques to create their different apparel
lines. That also means that employees must be trained in order to use the new
manufacturing techniques, which again leads to increased costs. Traditional retailers do
not experience higher costs in all of these areas.
Possibilities for Failure
Like traditional retailers, Zara has a threat of failure that can harm its sustainable growth.
The European switchover to the common currency called the euro has created the potential threat
for the Spanish Zara chain. In July 2002 the euro was the only currency accepted for all
transactions in member countries of the European Union (“Euro”). If the euro becomes stronger
against the American dollar, than production costs will increase for European producers. The
euro switchover will increase Zara’s cost of production. That cost increase will be carried over to
the consumer with higher prices. This threat of the euro may also create a threat of decreased
sales because apparel prices will be too high for the traditional Zara shopper. Another threat lies
with the quota elimination under the World Trade Organization agreement on textiles and
clothing expiring in 2005. Traditional retailers who outsource goods can benefit from greater
access to less expensive manufacturing. Zara will suffer from a high euro and the threat of its
competition offering more inexpensive products.
Zara’s direct competition may be their largest threat, especially when expanding into new
geographic territory. Almost any retailer can be a threat to Zara due to their wide range of
merchandise categories. Zara offers clothing and accessories for men, women, maternity,
children, and baby. Many other retailers also offer goods to one or all of those merchandise
groupings. The Gap is one of these competitors because they are also international and sell the
same range of merchandise with a less trendy style. H&M (Hennes and Mauritz) is probably
Zara’s most similar and threatening competitor. They too have been quick to “internationalize”,
which allows them to gain sales in countries outside their native Sweden (Ghemawat 5). H&M
also is more attentive when entering new markets and tends to enter one country at a time, as
opposed to Zara who multitasks globally (5). H&M builds distribution centers in their
international locations in order to cut down lead times and potential logistical costs. Another
threat to Zara is that H&M carries trendy clothing choices that they have designed based on the
melding of international apparel tastes. However, H&M offers these styles at a cheaper rate than
Zara (5). H&M also uses more advertising than Zara, but not as much as the Gap, which may aid
them in entering new markets successfully because the local customer is aware of H&M’s
merchandise mix.
A final threat to Zara is the issue of cannibalization. Zara’s extensive location strategy
involves putting multiple Zara stores that carry the same merchandise in the same cities. That
means Zara is trying to sell the same exact merchandise to the same people that reside in that city.
For example, the two hundred and twenty-five Zara stores in Spain can cannibalize sales from

7. each other especially if multiple locations are within the same city. Also, the other 544 Inditex
stores located in Spain can cannibalize Zara’s sales since the majority of the chains have a similar
target market to Zara. This is similar to the challenges faced by the Gap versus Old Navy: Gap’s
sales were cannibalized by Old Navy’s lower prices (Lee).
Recommendations
The best way for Zara to maintain their sustainable growth is to seek new opportunities in
the apparel market. With changing consumer behaviors as a result of globalization, and U.S.
department stores suffering, there are growth options available for specialty retailers like Zara.
Zara has the opportunity to be one of the trendiest/low priced retailers that America has seen
recently. Zara should most likely develop a second central distribution center in the Americas to
decrease logistics in order to deliver fashionable goods in a faster manner. Their second central
distribution facility should be an expansion of one of their smaller distribution centers located in
Argentina, Brazil or Mexico. The close proximity of the distribution center to the American
market will allow them to effectively interpret the particular American fashion. The distribution
center will also allow them to have additional funds to spend in other areas of business such as
advertisements: a necessary feature to penetrate the American market.
Another market opportunity for Zara is to invest in Internet retailing especially directed
toward the U.S. market. Though Zara is wary of overexposure, Americans like to be able to
purchase all goods including apparel from the comfort of their own homes at any time they chose.
Therefore, since Zara is looking to expand in the U.S. market they could realize the potential for a
direct Internet selling strategy. That form of direct marketing will reach more consumers faster
and easier. Though it may be difficult to display all of Zara’s ever-changing fashions online, it
may prove profitable for shoppers to purchase a moderate selection of trendy Zara pieces along
with some of their staple basics.
A final recommendation for Zara is to offer specialized products for different geographic
locations within the same city. Zara already does this to an extent for different international
preferences but more specialization will increase consumer demand and will motivate them to
visit more Zara locations within their own region. In some cities the company is possibly
experiencing cannibalization because there are too many Zara stores that carry the same product
within one city. Zara could differentiate its product from location to location to increase shopper
traffic. This would work because shoppers would hear about new/different products (possibly
from word of mouth or increased advertising) that another Zara store is carrying across the city
and they would be intrigued to pay a visit. That way sales wouldn’t be stolen from their own
Zara stores, decreasing cannibalization for the chain.
In conclusion, Zara has the potential for sustainable growth due to its competitive
advantage and its ability to face the challenges of the apparel industry. The company keeps its
operating income elevated, has a strong and unique business model, and has various opportunities
for expansion in the retail industry. To many Europeans, Zara is a familiar face with consistently
trendy, well-priced new apparel every week. To Americans, it is a company that is just getting its
feet wet in the American market. Though, the Inditex branch is researching and developing new
methods for expansion, the company must continue to re-invent and innovate themselves in order
to stay fresh in the apparel industry. Today, many companies are looking to Zara as the new
industry standard for how to run a retail business, which shows that Zara’s business model is
becoming the wave of the future.
1
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2
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3
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4
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5
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6
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7
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8
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